Thursday, March 20, 2014

When I log into my taxable brokerage account, I look up the dividends paid so far this year, and I find the following:
NATURAL RESOURCES ROYALTY (HGT) $8.28.
QUALIFIED DIVIDEND (MCD) $12.15.
Notice there are different types of dividend income payments. As with dividends from REITS, the natural resources royalty paid by Hugoton Royalty Trust does not receive the qualified dividend treatment that the dividend from McDonald's does. Qualified dividends paid by most public companies like McDonald's, Starbucks, General Electric, etc., receive a special tax treatment that is usually much lower than the investor's marginal rate. Most investors, like yours truly, get to pay just 15% tax on qualified dividends. On the other hand, if the investor's marginal bracket is 33%, he would keep only 67% of an ordinary dividend paid by a REIT or a natural resources royalty paid by a royalty trust. However, if the investor's marginal bracket is 39.6%, he also gets nailed with a 20% tax on qualified dividends--not 15%. So, while most investors pay 15% on qualified dividends, the wealthiest investors now pay 20%. And, investors whose marginal bracket is no higher than 15% pay a tax rate on qualified dividends of . . . zero percent.
What does any of this mean to an investor? Well, if he's only getting $12.15 quarterly from Micky Dee's, not much. But, if he were receiving $120,150 quarterly on top of a decent salary, that would push him into the 39.6% bracket, and he'd be keeping 80%, not 85% of that income. How much difference would that 5% make? Enough to buy his daughter a new baby-blue Subaru. Real money. To Mitt Romney, it means no more 13.7% tax rate. He'll continue to live mostly on qualified dividends, but that will start him out at 20%, not the kinder, gentler, 15%. Again . . . real money.
One thing is clear, when Democrats call the new tax code changes a "tax on millionaires and billionaires," we now see how dubious the claim is. First, the 39.6% marginal bracket and the associated 20% tax on dividends kicks in on the income above around $400,000 a year--is that anyone's definition of a "millionaire-and-billionaire"? Also, the true millionaires-and-billionaires out there can, like Mitt Romney and Warren Buffett, live mostly on qualified dividends, so that whole 39.6% marginal bracket is meaningless--you can bump it up 5 points, but they're still paying 20% or less on their dividend income. When the tax-hiking Democrats change the tax code like this, they end up hitting folks in the middle brackets much more. Folks living paycheck to paycheck don't receive a lot of dividend income, so when politicians push the "millionaires and billionaires" up to higher brackets, the folks below them get pushed up, too. Since they live paycheck-to-paycheck, bumping the rate they pay on that income hits them square in the face.
Because of the 15% tax on my qualified dividends, I now fund my taxable account regularly, the way most people fund their IRA. In addition to my SIMPLE IRA contribution, I make sure to put more and more $ into my taxable account, where I try to buy mostly dividend-paying stocks. By the time I retire, I hope to collect a decent income stream on these dividends and keep 85% of it. And, if I sell any stocks for a long-term capital gain, I keep 85% of that, too. While it's nice to build up the SIMPLE IRA, all withdrawals from there will be taxed as ordinary income. So, as you can see, the changes to the tax code make the taxable brokerage account something worth considering in addition to true retirement accounts.

Friday, March 7, 2014

Suitability of recommendations is an important part of your Series 7 exam. Use the link at the end of this brief post to sign up for a FREE class starting in just a few hours. We'll break down 10 practice questions similar to what will show up on your test, and we'll dig into key concepts including: time horizon, liquidity needs, investment objective, and risk tolerance as they relate to various investment vehicles. Sign up now!